ChipMOS TECHNOLOGIES Inc. (IMOS) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the ChipMOS First Quarter 2015 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. If you miss any portion of today’s conference and would like to hear the replay please dial 858-384-5517 with the pin number of 13606725. I would now like to turn the conference over to your host, Mr. David Pasquale of Global IR Partners. Please go ahead.

Thank you, Operator. Welcome, everyone, to ChipMOS' first quarter 2015 results conference call. Joining us from the company today are Mr. S.J. Cheng, Chairman and Chief Executive Officer, and Mr. S.K. Chen, Chief Financial Officer. SJ will review highlights from 2014 and then provide ChipMOS’ second quarter 2015 business outlook. S.K. will then review the company's key financial results. We will then have time for any of your questions. If you have not yet received a copy of today's results release please email Global IR Partners at imos@globalirpartners.com, or you can also get a copy of the release off of ChipMOS' website, www.chipmos.com. Before we begin today’s prepared remarks and Q&A we must make a disclaimer regarding forward-looking statements. During this call management may make forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks and uncertainties, and other factors which may cause the actual performance, financial condition or results of operations of the company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the company's most recent annual report, on Form 20-F, filed with the US Securities and Exchange Commission and in the company's other filings with the SEC. At this time I would like to now turn the call over to Mr. S.J. Chen. Please go ahead, sir.

Yeah, thank you David. Welcome everyone to our first quarter of 2015 conference call. Hopefully you all had time to review our earnings release. Overall our Q1 came in where we expected. Revenue and the margin was in line with guidance. CapEx spending was lower in the quarter than we budgeted. Our positive operating leverage in our business allowed us to keep gross margin above 23%, even on 10% reduction in quarterly revenue. As a result, we continue to generate healthy free cash flow and pay down our debt. Q1 is typically a lower quarter due to seasonality. We would normally expect to see an uptick in Q2 and a higher quarter in Q3 and Q4. This year, however, folds in the industry are looking for softness to continue into Q2, with the second half then coming in strong. We share that view. For ChipMOS, LCD driver for large panel remains strong, this by the demand for 2K/4K TVs. This helped us to offset weakness in small panel LCD driver from lower camera, PC and smartphone demand. As a result, we were able to maintain company revenue at about the same levels. The key for ChipMOS is that we remain one of the two largest OSAT companies serving the LCD driver demand. We have proper capacity and can [indiscernible] down, if the demand is lower in Q2. But we would be expecting to see things start to pick up exiting Q2 into Q3. Our forecasts remain on growing our value in the market and [indiscernible]. For example, we continue to move forward with our corporate streamline. We have made considerable progress over the past few years. The next step of ours is the ThaiLin merger. I am pleased to report that on April 22, 2015 all of the necessary regulatory approvals for ThaiLin merger was returned with no further comment. The Board of Directors of both ChipMOS Taiwan and ThaiLin set the effective date of merger to be on June 17, 2015. We expect this to be a major value catalyst for the company and shareholder, and we are doing everything we can for to moving forward in a timely manner. Once we close the sale of, we can move forward with other corporate measures. We are also excited about the potential for further growth in China. We have had operations in China since 2002. We know the market very well. When we entered the China market, we are presently on the early stage. We add LCD driver capacity, but had to pull back around 2008 with the financial crisis. During the entire time, we had built relationships with customers, financial partners and government. This has served us well by keeping us close to the market and put us in a good position today. Recently, the Chinese government has been making a great push to build up the domestic semiconductor industry. This we are seeing in the market with the investment made including several merger and acquisitions. Based on the comment it’s understood that the government want to build up the entire semi supply chain from design to foundry and the semi [indiscernible]. We think there may be an opportunity for ChipMOS to now further expand our presence in China. We are one of the only two companies, to specialize is LCD drivers segments. This is a very good expertise. We are in the process of evaluation, what is involved and cost around restarting our LCD driver turnkey business in China. We think there is a real potential, but we are not looking into doing or not anything at this point. We will update you as we reach any decision. This is just another area we are working on, that could become a bigger growth catalyst for us. In terms of adding more color on the first quarter, our LCD driver decreased around 4.1% in Q1 2015 sequentially, represented 26.3% of our Q1 sales, with revenue growth of 2.2% in large panel driver and growth of 13.7% for small panel driver. In memory, revenue in our DRAM business, led by softness in commodity DRAM demand, decreased 12.6% in the first quarter compared to the prior quarters. This represents about 33% of our Q1 revenue. Our flash business, including Mask ROM, declined around approximately 27% over prior quarter for us accounting for about 13% of total Q1 revenue. Revenues from mixed-signal and bumping remained flat sequentially. They represented 6% and about 20% of our total Q1 revenues respectively. One bright spot was our [indiscernible] revenue, which grew 11% in Q1 compared to the Q1. Finally, revenue from our SRAM business decreased 17% in Q1 compared to Q4. SRAM represented 2% of total Q1 revenues. Let me now turn to our Q2 outlook. Based on our outlook, we expect the weakness seen in the first quarter will carry over to the second quarter. Overall, we expect a bottoming out with second quarter of 2015 revenue flat to down low single digits as compared to the first quarter of 2015. We expect gross margin on a consolidated basis to be in the range of about 20% to 24% for the second quarter of 2015. In summary, we expect first half of 2015 year to be softer, followed by a strong second half in 2014. We have a clear business focus and growth strategy. Our CapEx plan is conservative and our continue coverage streamlining initiatives are moving forward. We continue to generate positive free cash flow, revenue [ph] and pay down our debt. We are executing on our growth and value driver and continue to build value for our shareholder. Let me now turn the call over to S.K. to review the first quarter financial result. S.K., go ahead.

Thank you, S.J. All dollar amounts cited in our presentation are in U.S. dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on the exchange rates of NT$31.24 against US$1 as of December 31, 2015. As S.J. reviewed our revenue and margins, I will provide details on the rest of our first quarter 2010 results. Net income for the first quarter of 2015 was $12.1 million and $0.42 per basic and $0.42 per diluted common shares compared to the net income of $18.8 million and $0.65 per basic and $0.64 per diluted common shares in the first quarter of 2014. Our operating expense in Q1 was $11.8 million or 7.1% of our Q1 revenue compared to $12.6 million or 6.8% above revenue in Q4 2014. Other operating income in Q1 was $0.8 million and non-operating expenses in Q1 was $1 million. Income tax provision for Q1 was $4.9 million compared to $10.3 million in Q4 2014. The non-controlling interest for the first quarter of 2015 was $9.8 million as compared to $13.4 million in Q4 2014. On a segment basis, Q1’s revenue breakdown was 23% in testing, 31% in assembly, 26% [ph] in LCD driver IC business and 20% in bumping. Total capacity utilization was 72% for the first quarter of 2015 compared to 81% for the fourth quarter of 2014. Our Q1 testing capacity utilization decreased to 58% from 74% in Q4. Assembly capacity utilization was running at 64% in Q1 as compared to 80% in Q4 2014. LCD driver IC capacity was running at 78% utilization in Q1 and 82% for bumping. We spent $32.3 million on CapEx in Q1 compared to $50.7 million for our fourth quarter 2014. The breakdown of CapEx for the first quarter was 24% for testing, 17% for assembly, 50% for LCD driver IC and 9% for bumping capacities. As I said in audit, we continue to be conservative in our CapEx investment. With the potential for softness in Q2 we will closely monitor the situation so we do not add CapEx too far ahead of actual customer demand. Depreciation and amortization expenses were $23.4 million or approximately 14% of revenue in the first quarter. This was slightly higher compared to the fourth quarter 2014. EBITDA for Q1 was $51.2 million or 30.7% of revenue. EBITDA was calculated as earnings before income taxes, foreign currency gain or loss, net interest expenses, depreciation and amortization expenses and special charges. While EBITDA is not defined by Generally Accepted Accounted Principles, we believe it is a helpful way to measure our financial strength. The free cash flow in Q1 was $3.7 million, which was calculated by adding depreciation, amortization, interest income together with operating income and then subtracting CapEx, non-controlling interest, interest expenses, income tax expenses and dividend from the sum. We ended Q1 with a strong balance of cash and cash equivalents of $518.4 million compared to $488.6 million at the end of Q4 2014. As of March 31, 2015 we maintained our net cash position at $244.8 million which resulted in a net debt-to-equity ratio of minus 52.3%. This is after we spent $32.3 million on CapEx in Q1, compared to $50.7 million for our fourth quarter of 2014, and after we reduced our net debt by approximately $7.1 million in Q1. Our total short-term debt including current portions of long-term debt was $88.6 million at the end of first quarter 2015, as compared to $104.9 million at the end of fourth quarter of 2014. Long-term debt increased to $185 million at the end of the first quarter, as compared to $146 million at the end of fourth quarter 2014. Our accounts receivables days outstanding Q1 was 79 days, compared to 75 in Q4 2014. Payment receivables [ph] was 39 days, compared to 36 days in Q4 2014. Foreign exchange recorded a loss of $0.7 million in Q1, compared to a gain of $5.7 million in Q4 2014. Our interest expense was $1.1 million in the first quarter which was slightly higher as compared to the first quarter of 2014. Operator, this concludes our formal remarks. We can now take questions.

Thank you. [Operator Instruction]. Our first question comes from Timothy Arcuri from Cowen & Company.

Thanks a lot. I had a couple of questions. First of all, S.K. if I look at June, June has never been down. I am looking certainly since like 2010, you have actually never seen a down June. I know that there is lot of LCD driver, IC inventory for small panels out there, mostly in wafer form and this certainly needs to clear. But I guess, my question is how confident are you that your revenue will comeback in Q3? Normally Q3 is sort of a mid-single digit. I am wondering if you think that the potential is that we should assume that Q3 is up better than sort of the mid-single digit that it’s typically been up?

Yeah Tim, this is S.J. let me answer your question. Currently we see the positive movement for inventory correcting. And we also see that getting more and more stronger in the TV side. And also the worker labor reduce [indiscernible] compare with in April timeframe and another new model and new sample was ramped up in the qualified or engineer sample stage, so we had commented that we’ll see the very positive feedback in the second half of this year.

Okay. Thanks a lot S.J.. And then I guess, can you talk - this is I sort of noticed in the release, this is the first time that you talked more specifically about creating more shareholder value and it sounds like the collapse of ThaiLin shares is now a major hurdle that’s cleared. So can you maybe talk a little more specifically, S.J., about what your plans are there?

Okay. I think, as I said to previous question, I think a lot of investor also asked me the same question, so you may also in the conference call. As a management team we made a very clear statement and commitment in the last conference call. The ThaiLin corporate structure is our major mission. That also can generate best benefit for all the shareholders. It may take time. But we just take step by step and we already had good progress. We already received all the regulatory approval in April 22. The two companies have already said, the effective date will June 17, this year. So after 2015 we can take the next step. But before that we cannot talk too much. That will create some regulation problem and ego issues. So please give us some time. We do a lot of homework. Once the picture is clear, then we are very happy to share with all the shareholders.

Okay, S.J., thank you. And then, I guess, last for me, can you, S.K., can you give us a little sense of maybe what you think the quarterly changes in June will be in revenue. So if you were to take the different segments and sort of give us a sense of which will be the weakest segment, which will be the strongest segment in June and then maybe what the gross margin might be or rather from March, what the gross margin was by segment for March and what you think it will be for June? Thanks.

Well, I think we provided the colors in our press release. And I think the optimistic view so far is the June revenue will be flat, compared to Q1 and the margins will be in the mid of the range. I think that’s our target. We don’t rule out any probability that the business coming in stronger in June. And then we will have a better results in our guidance.

Okay. Thanks.

Thank you. Our next question comes from Jerry Su from Credit Suisse.

Yeah, hi. Good morning S.K., S.J. This is Jerry from Credit Suisse. Just few follow-up. I think, in the Q4 Analyst Meeting, you have mentioned that you have full-year target, given that the retail weakness of the Q2, have you change, or can you give us update on your four-year target for the revenue?

Yes, we talked about the full year. I think as I mentioned in the past, and to be in the range of 5% to 10% growth year-over-year. But since that we have a little bit softer first half in the year, the softer business in the first half of 2015. So I think we need to tune down a little bit the revenue for the full year. I think it should be in 3% to 5% growth, sequentially. I think that's a conservative estimation based on our current business situations.

So based on this forecast, seems like the second half you will see a pretty strong recovery, talk a little bit about which division [ph] is seeing a bigger rebound in second half and also the - I think you have mentioned that you're working on some newer projects for the flash testing and then do we have any update on that as well? Thank you.

Jerry it’s SJ. I just have one more comment about the whole year of 2015. In the last year, Q4 is very strong Q4 I ever had for the past few years. And this year, the pattern is very straight compared with my past experience, because of softness of the Q2. We internally say that for the management team, we're going to invest CapEx based on the revenue basis and also looking for the organic growth of 5% to 10% as end year target. Then we're based on the market relative to the customer, which including our CapEx and our revenue target. And for the - we receive a lot of information from the market and another company already cut down their CapEx and also just the inventory. And we see a very good progress right now. So starting from Q3 based on our current customer feedback we will see a positive in Q3 and we have several segments also are see a very productivity. So like our mixed-signal and other new LCD driver for 2K/4K TV application that’s what they are driving and regarding the FLASH memory we are not talking to individual customers too much but I can tell you so far so good.

Okay. Thank you. Just one follow up on the second half. I think you mentioned that LCD, 4K and also mixed-signal will be the cost [ph] driver for this year, but your assembly was down around 22%. What is your outlook for the - of the assembly business later this year?

Yes. Assembly that maybe coming from the memory side, so memory side and after the inventory was cleaned in Q2 and maybe after effective [indiscernible] Q3 and Q4 we expect to be lower.

Okay. Got it. Thank you.

Thank you. Our next question comes from Richard Shannon from Craig-Hallum.

Hi, S.J. and S.K., thank you for taking my questions. S.K., I just want to follow up I didn’t quite hear your response to one of the most recent past questions about your revenue growth number for this year. Did I hear you say, plus three to plus five year-on-year growth this year, is that right?

Yes. And I think that’s our estimation at the moment.

Okay. Perfect. I just wanted to clarify that. Thank you. Given the inventory situation with, especially on the small panel side, have you seen any change in the trajectory of pricing in the near term - in the shorter term at all?

Richard this is SJ. Currently, we don’t see too much pressure on this.

Okay. Fair enough. And then S.J., maybe, a follow-up on your remarks, prepared remarks regarding some - I don’t know if you used the word investment, but investment in China on the LCD side. I know you said that you hope to report more on this later. Can you give us a sense of what kind of timing we might hear about any arrangements or partnerships or investments that you might make there?

Yeah. Thank you, Richard. It’s a pretty good question. I just will take couple minutes to explain the whole background. Actually the ChipMOS invested in China around the beginning of 2001, and we had operation starting 2002, which included memory first. Then in 2003, we invested for LCD driver, which included the pumping, COG and COF. We faced a very critical situation in 2008. So we pulled back all the LCD driver and consolidated into our Taiwan factory in order to further reduce our operation costs. And, right now, the LCD driver for the passing ten years struggling, only two major survivors in the industry, which including Chipbond and ChipMOS. And right now we are pretty strong in capacity, technology and also customer base. And recently the China government had a very strong intention to establish the infrastructure of a broad semiconductor, fabrication and handheld and also CRT/LCD industry supply chain. And you can continue to see several merger and acquisition in the market. And China also continues to establish new capacity for CRT plant, which including 8.5 generation and also 10.5 generation. So they had a bigger demand for panel, especially for TV demand. And as for ChipMOS side I think we already have existing facility in China and a facility we already invested for. So based on our current situation, first one if we start up project, there will be a less investment for us, because building facility already be in place, also in a good shape. Second one, less players in China. There is good opportunity for us. And right now we are doing evaluation this project. Once the project is clear then we are going to update to you more clearly.

Okay. Appreciate the detail S.J. I think that’s all the questions from me, I’ll jump out of line. Thank you.

Okay.

Thank you. [Operator Instructions] Our next question comes from Tony Cheng from Morgan Stanley.

Hi S.J. and S.K. thanks for taking my questions. So first of all, it’s regarding your memory business. It seems that in terms of shipments it’s quite weak in both 1Q and 2Q. Is there any reason related to your customer’s market share or your market share? And how does your gross rate compared with your industry peers such as the Powertech in 1Q and 2Q? Thanks.

Actually, we do the memory for quite long time now, and based on the consumer interest and the focus that we’ve got, Q1, Q2 is weak. But regarding to the allocation and performance wise, we don’t see any big changes up till now. And for the inventory consumption and correction, we see a good progress, because customer continues to reduce their inventory level. So that’s the reason, we can more obviously to see the second half will recover.

Okay, thanks.

I cannot compare with my competitor, our business model is different there.

Okay, thanks. So, next could you please quantify some churns that you are seeing regarding the inventory depletion, and also the China operation for example, for the LCD driver IC, can you quantify the wafer bank today versus the new label and what’s the progress, meaning the wafer bank level in 1Q versus for today?

Yeah. We continue to see the wafer with the level of inventory continue to consume our customer side. And you also can see that right now also give the guidance for the Q2 they are slightly up. So but regarding to the loading effects, I think our customers adjust some water inventory, but they also give a positive in the second half. So we have some confidence second half the recovery will be much better. And on the other hand, there is 2K, 4K application, not only in TV. And last month when I go to Japan to meet the customer I also take a look on the street, you can see a lot of new products not only in TV, but also in camera, video, also even GoPro they use 4K. Some people may clear the 8 K TV in the future. So for LCD drivers I think the 2K, 4K, right now is the mainstream, so the consumption will continue to increase. So we have strong confidence that 4K, 2K application getting more wider, more applications, so they can bring out more benefits in the future.

Okay. And on your China business development can you quantify how many wafers in terms of percentage was from China last year and how many wafers will be from China foundries from this year and who are these China foundry customers? Thank you. [Technical Difficulty].

Thank you. [Operator Instruction].

Hello, hello.

Yes.

Yeah Tony, to answer your question, did you ask foundry sale, panel sale sorry I cannot hear you.

The foundry size, for example how many wafers is from for example [indiscernible] CSNC and SNIC [ph] last year in terms of percentage of your wafers and what would be growth for this year?

For this year, the major wafer foundry side cannot be changed, but we continue to see more and more new wafer sale in China, there are the result for LCD driver, the technology and also capacity.

Okay. Lastly…

I am sorry. This is S.K., let me give you more color. Last year the less than 10% of the LCD IC wafer coming from China and we, I think that you [indiscernible] we are not disclosing statistical that presently many Chinese foundries try to enter into LCD IC business and we also observe this trend and it could be pretty helpful to our LCD driver, but we didn’t - we didn’t expect that there were ramping in the past, in the first half of this year and we will see how that happen in second half of the year.

Okay. S.K., lastly very quick, can you update the full year CapEx and depreciation numbers?

The full year depreciation would be around US$100 million. And the CapEx right now as we announced in the last earnings, we say, it should be less than $125 million for the whole year 2015. Right now in our estimation, the number should be around $120 million. So this is our target.

Okay. Got you. Thank you very much.

Thank you.

Thank you. At this time, we have no further questions. I will turn the call back over to Mr. S.J. Chen, Chairman and CEO of ChipMOS for closing comments.

Thank you, everyone to join our Q1, 2015 conference call. Thank you very much. Bye-bye.

Thank you. Have a nice day. Bye-bye.